Argentina’s Inflation Crisis: The Fallout from Peso Devaluation

Summary

  • Milei, a political outsider having assumed office in mid-December on the voter fury at the political elitists, caused an over 50% devaluation of the embattled, artificially sturdy peso currency that is currently kept under control by capital controls.
  • This action resulted in an outburst of repressed inflation, with costs in food, apparel, and transport adjusting sharply after the devaluation. This was an attempt to close a significant gap between the official exchange rate and the commonly used parallel rates.
  • Lucio Garay Mendez, an economist at EcoGo, anticipates inflation of 29.1% for December and the annual rate to be at around 222%, with more price surges expected this year.

Political Outsider’s Approach to Financial Crisis

Milei’s tenure, which started in mid-December, has been marked by voter frustration with the political hierarchy. His key policy move, a dramatic over 50% devaluation of the beleaguered, artificially solid peso currency, has been constrained by capital controls.

The Aftermath of Devaluation

This policy decision prompted a surge of accumulated inflation, with expenditures in food, clothing, and transportation sharply adjusting following the devaluation. The main goal of this measure was to lessen a significant gap between the official exchange rate and commonly utilized parallel rates.

Impact on Tradable Goods

Eugenio Mari, the primary economist at the Libertad y Progreso Foundation, remarked that this acceleration was significantly prompted by the accommodation of costs that was artificially postponed. The wholesale exchange rate played a pivotal role, triggering a rise in tradable commodities’ prices, notably in food and drinks, where a monthly increase of around 35% was registered.

Projected Inflation Rate

Analysts forecast the inflation rate to vary between 16.9% and 31.5% for the month. The official data will be made public by the INDEC statistics agency on Thursday. The steep inflation, escalating persistently over recent years due to fiscal deficits, diminished peso confidence, and government financing through money printing, is the chief cause behind Argentina’s worst economic crisis in two decades.

Argentina’s Economic Situation

The country’s net foreign currency reserves are significantly in the negative, with almost two-fifth of the citizens living in poverty. With gigantic debts pending and government hurriedly reforming a $44 billion loan pact with the International Monetary Fund, these financial conditions are daunting.

Milei has acknowledged the likelihood of inflation hitting around 30% in December under his proposed austerity measures and spending reductions. He has also noted the situation could have escalated worse than this.

Future Projections

Lucio Garay Mendez from EcoGo has estimated a December inflation of 29.1% and an annual percentage of approximately 222%. He also predicts further price augmentations this year. “Regulated prices, which were furthest behind in previous management like prepaid insurance, fuel, public transportation, electricity, and gas rates, will face new increases in 2024”, says Mendez.

Given these economic changes, forex traders should monitor the Argentinian peso’s stability and how inflation will shape the country’s economic future, impacting market trends.

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